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December 22, 2006

Louisiana: Adventures in Property Tax Deform

In at least one Louisiana parish, some folks are pushing to change the way property taxes are administered by putting a cap on the amount by which a home's taxable value can grow from one year to the next. As the Times Picayune explains, this idea is being championed by the assessors themselves in St. John the Baptist Parish.

Whitney Joseph Jr., the St. John assessor who is leading the effort to amend property tax rules, has not determined the exact limit he wants for the annual property tax increases. But he admires the 2 percent cap that California passed in 1978 with Proposition 13... "Hurricane Katrina not only devastated people's lives as far as destroying their properties, but it also increased the market value on things," Joseph said. "Everything went up. Insurance is going up on homes because of Katrina and now we are going to have to double or triple your taxes. Something has to be done."

But market value is supposed to be the basis for measuring a homeowner's ability to pay taxes. What's so wrong with that? Here's Joseph's take on this:

"This is not normal growth, people were coming in and desperate to buy homes," Joseph said. "They lived cramped in homes with their family and in hotel rooms, and when they received the insurance money they wanted to buy homes. They came in and started buying. I don't think they cared about how much they cost."

The "let's cap assessed value" approach is wrong in general because it makes property taxes more unfair, as we've discussed elsewhere. The first step in making property taxes fair should be ensuring that they're based on what a home is actually worth-- and assessed value caps basically abandon this fairness goal. Caps basically say that the (typically poorer) people who live in undesirable neighborhoods should have to pay a higher property tax rate than otherwise identical people who live in popular neighborhoods. (This is because poor people will be paying tax on 100% of their home's value, while wealthier people will be paying on less than 100% of their value due to the assessed value cap.)

But there's a new twist here. Whitney is basically arguing that the yardstick Louisiana is using for measuring a homeowner's ability to pay taxes-- market value-- is simply a flawed measure in Louisiana right now. He's arguing (implicitly, at least) that post-hurricane real estate speculation has created a temporary bubble in real estate values that shouldn't be reflected in the property taxes people pay. A house that sold for $50,000 six months before Katrina is selling for twice that in Katrina's wake, and that (he argues) is a bubble that won't last.

At the heart of Whitney's criticism is a basic truth about the property tax: for a lot of homeowners, a lot of the time, the "market value" of a home is pretty irrelevant to your short-term well-being. In the property tax world, a booming real estate tax market can make you "rich" pretty fast by jacking up your home's value, but if you have no plans to sell anytime soon, this doesn't make you "rich" in a way you can appreciate at all. The only real impact is that your property taxes go up.

In the long run, of course, the use of market value as a yardstick is defensible because when you sell your house, you will absolutely enjoy the benefits of your home's growing value-- unless it turns out to be a temporary bubble. And Whitney is basically saying that's exactly what is going on with Louisiana.We've argued in the past that assessed value caps are just a bad idea because they create a gap between a home's assessed value and its actual worth. But if there's ever a time when these caps are appropriate, it's probably when a home's "actual worth" is being temporarily inflated due to a real estate bubble. At first glance, it's a compelling argument.

And yet. For every home that has rapidly appreciated due to the recent wave of speculation, there's another home in a lousy neighborhood that isn't appreciating. And property tax caps, even in Whitney's "bubble" scenario, inevitably result in a tax shift away from the rapidly appreciating home toward the lousy-neighborhood home. That sort of tax shift is unfair in a way that assessed value caps can never justify: seeking to fix one perceived source of tax unfairness by making taxes even more unfair in a different way.

There's a lot more to discuss here. From a practical perspective, there's the whole question of, if you're gonna have a tax cap, what that cap should be. The 2% cap implicitly suggested by Whitney's comments about California would be dangerously low, for reasons we'll discuss another day. But for the moment, the thing to remember is that Whitney's attempt at making the property tax less unfair would create a whole new kind of unfairness-- and one that would make affected homeowners just as mad as the current bubble is doing.

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The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state - Adam Smith, An Inquiry Into The Nature and Causes of the Wealth of Nations, 1776